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    GDP components and their importance

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    Looking at the components of GDP, and trying to see the importance of each component C, I, G, and Xn. Are consumer's purchasing decisions important to the economy? Which of these variables is the largest component of the GDP? If people decide to spend less on any additional income they receive, how does that impact the multiplier?

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    Solution Preview

    GDP components are consumption (C), Investment (I), government expenditures (G) and net export (Xn). All of them are important but the degree of importance depending on the economy. Certain economies rely more on C, while some others are relying more on I, some on G and some on Xn. Consumers' purchasing is very important especially for big economies in terms of population as well as for matured or developed economies. For underdeveloped or developing economies the importance of consumers' purchasing is not as significant as for the developed economies.

    In general, consumers' purchasing decision is very important to strengthen the multiplier effect on the initial increase in GDP. If consumers do not spend, there will ...

    Solution Summary

    The importance of GDP components vary among economies. The rich economies depend more on consumers while the poor ones relying more on government spending. The developing economies put more weight on investment as the engine of growth, while for a small open economy relying a lot on export. In general consumer spending is important for all economies in order to strengthen the multiplier effect, which in turn will promote growth.

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